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Perpetual Inventory Use in Supermarkets

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It is amazing to me that certain inventory-based businesses still do not see the need or benefit of a perpetual inventory system. We live in a world where data is so important to operating a business, so why a business owner would put their trust in a highly manual process, such as physical inventory counts, is perplexing. This is especially true in a business like a supermarket where there are tens of thousands of SKU’s in a single store.

Let us begin by stating the obvious. A perpetual inventory system can be extremely costly on its own. Not to mention the fact that employees need to be trained, integration between accounting and point of sale systems needs to occur, and most importantly, a system of controls needs to be implemented. For a single-store owner, the cost may be so exorbitant that it would outweigh any benefits the perpetual system would create. But if we can get past the high cost and focus solely on a perpetual system, we can begin to see why it is so important to this type of business.

What are the common challenges that occur when performing a physical inventory?

The fact is that having to perform a physical inventory in a grocery store is a monumental logistic task. Think about the sheer size of some of the stores you visit on a weekly basis. The reality is that we are talking about 40,000 to 65,000 square feet of wall-to-wall items. Given this challenge, it is highly unlikely that your employees are going to be able to accurately count those items in a timely fashion. One option is that you may utilize a third-party service ($3,000 - $5,000 per quarter to count a store) to come in and count the inventory. This is typically conducted while the store is open for business. These companies exist and some are very competent. However, there is still a disruption to your store and you are also relying on outside people to tell you the quantities and value of your products.  On the other hand, if your employees are doing the counts, do you have to close the store down during that time? A more accurate count would be obtained because shoppers would not be taking groceries off the shelves while counts are done, but it is probably not realistic to shut a store down in the middle of business hours.

What are the benefits of using a perpetual inventory system?

If you are at least considering the use of a perpetual system, you are not completely off the hook concerning manual processes. There are still controls that need implementation, which would involve performing cycle counts among other tasks.

I remind you though that a fully implemented perpetual inventory system does not stop when you purchase the software. Rather, employees need to be trained on the system and must fully “buy-in” to its usage. You need to ask yourself how effective the process will be. For example, think about what happens when an item that leaves the shelf is not scanned out of the store through a point of sale system (i.e. breakage, theft, internal department usage, etc.)? In other words, what controls are in place to make sure those items are adjusted for in the perpetual system? Then you can ask yourself a second question regarding incoming inventory. Do you know if there are  controls over how orders are received and entered into the perpetual system? It is clear that the system can only be effective if it is embraced by the employees and if the employees truly understand the benefits of utilization. In this case, communication is of the utmost importance as well as setting a positive tone at the top.

Cycle counts are just the beginning. Best practices for scheduled (i.e. daily, weekly, monthly) inventory maintenance should include checking negative inventories, scanning “holes” and low spots, reviewing out of stock items, scanning damages, looking at items with zero movement over set periods of time, reviewing variances from period to period and inventory adjustments within the system, and monitoring shrink.

How can you ensure the success of a perpetual inventory system?

As with any properly implemented internal control process, monitoring and accountability should be a top priority. As certain inventory responsibilities are completed, sign-offs should occur on an inventory “task sheet” to indicate who performed it and when they performed it. Subsequently, a responsible party such as a manager should be reviewing and signing off on the task sheets as well as reviewing adjustments made within the inventory system to ensure that they were properly completed. Noncompliance should be reprimanded and compliance should be rewarded to show to others the importance of the system to the business.

Finally, it is now on you, the business owner, to utilize the information that results from proper usage of the perpetual inventory system. The data can be invaluable for making better-informed decisions over purchasing, merchandising, and other financial related items.

Chris Martin, CPA